The Three Stages of a Startup

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Back when I was a seed VC I was fond of telling folks that they didn’t have a company yet. I wasn’t trying to be mean. I was trying to instill ruthless focus. Seed rounds are small and runway is measured in iteration cycles. How quickly can you iterate till you have product / market fit?

In my books there are three stages to building a startup. And only the last one has anything do with a company.

Stage 1: Project

You have an idea. You research to test and validate hypotheses and find a pain point in the market. You start building wireframes and mockups. You maybe start collaborating with someone. At this stage you have a project.

Stage 2: Product

You’re building momentum and starting to think you’re onto something. If you don’t already have a co-founder and  team, you start building that now. You shift into maker mode and start turning your ideas into v1. Around this time, you probably raise your seed round.

Stage 3: Company

You’ve built and launched a product. You have iterated that product to find product/ market fit in a large and clearly defined market segment. You have proven early monetization and cost of customer acquisition. As a result you see a path to profitably acquiring a large customer base. Only now should you consider building a company around your project.

You could argue that the company stage also has several stages. That’s true. But the point here is more about the focus you need upfront. I meet many seed stage folks. They have fancy titles. They’re worried about board meetings. They’re spending time on things that only belong in the company stage.

None of that matters till you’re at the company stage. Until then, you’re not a CEO. You’re a maker. You don’t worry about marketing because you don’t know if you’ve built the right thing for the right market. Anytime you’re not spending making and validating what you’ve made is wasted time.

Now, I know what you’re thinking: Maybe this makes sense, but you need to fundraise. You’re burning money and investors only want to fund ‘companies’. They want to hear about big visions. So you spend time putting together huge, fancy powerpoint decks. And of course you spend months raising money taking you away from making.

All true, but here’s the thing: Momentum is the thing that makes or breaks investments. If you get distracted from the path to product/market fit with all this company building stuff, you will likely lose momentum. Founders trying to raise money often face a chicken and egg dynamic: It takes a long time raise so you have to start early. That likely means you’re not actually ready to raise, making it harder and longer and keeping you away from what matters.

So what should you do?

Target the right investors: It’s nice to start getting to know series A investors, but they won’t fund you now. Only focus on the angels and seed funds that focus on your sector and stage. These are likely product-focused investors. They won’t spend time asking you about unit economics and other crap that you won’t have an answer for early on.

Focus on the momentum that you do have: You may not have revenues to show, but you should have clear momentum on the product. This could be shown through things like: growth in active users, session length, session frequency, early signs of virality, etc, etc.

Make your seed round last as long as possible: Lots of product stage startups die before getting to the company stage. They die because they run out of money before getting the validation needed to become a company. As a result, investors don’t fund them. So you need to make sure your seed capital lasts long enough for you to cross the chasm from product to company. There are two ways to do that:

  • Raise as much as you can: At the seed stage you’re pitching the dream. Performance expectations from investors will never be lower than they are here. This is the time to raise as much as possible, without diluting yourself too much.
  • Stretch that capital out till you have company on your hands. You can’t save your way to greatness, but you can and should spend very carefully. If you stay in maker mode and don’t get distracted with stuff that doesn’t matter that will help you manage your spend.